A Shadowy Risk for Shareholders

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With the midterm elections finally over, a new risk may appear in next year's proxy statements. If the companies in your portfolio get called out for controversial political contributions, your investments could face a whole slew of dangers.

Dubious dealings
Activist investors now seem far more likely to bring this topic to light, given the Supreme Court's Citizens United ruling earlier this year (you know, the "corporations are people, too" decision), which freed up companies to contribute to political campaigns.

Earlier this week, The Conference Board, a corporate governance and research group, publicly pushed for corporations to adopt oversight rules regarding political spending, lest they face "serious financial, legal and reputational risk."

The timing of the Conference Board's public stance right before the midterm elections was no coincidence, since concerns about corporations' secretive, undisclosed political contributions abound.

The Conference Board's report pointed to Wal-Mart (NYSE: WMT  ) , Merck (NYSE: MRK  ) , and Freddie Mac as companies that faced particular public relations or legal ramifications after making political contributions.

Those three aren't the only examples. Best Buy (NYSE: BBY  ) and especially Target (NYSE: TGT  ) faced considerable consumer anger after it came to light they'd given campaign contributions to a Minnesota Republican candidate with an anti-gay marriage stance. This not only hit the news headlines, but also sparked consumer boycotts. Three activist investors filed related shareholder proposals at both retailers, demanding oversight over political spending policies.

Last summer, in the wake of the Gulf oil spill, BP (NYSE: BP  ) ended up in even more hot water over a political spending issue. The Washington Post pointed out that it had seemingly violated its own code of conduct, allowing political contributions even though the code supposedly forbids them.

In October, News Corp. (Nasdaq: NWS  ) , parent to the Fox TV networks, The Wall Street Journal, and MySpace, among others, faced pushback from an angry shareholder about its donations to Republican causes: "The apparent lack of a strategic rationale for News Corp. raises very serious concerns for shareholders as to whether Mr. Murdoch and the rest of the News Corp. Board of Directors are truly taking shareholder interests into account when they approve political payments made with shareholders' assets."

Fight for full disclosure
Activist investors seem sure to push for full disclosure of political contributions from public companies. When some of those contributions come to light, shareholders and consumers might not be happy.

Political donations clearly might not be the best use of shareholder capital, particularly if they aren't reported in a responsible, transparent manner. The best companies compete on their own merits, rather than trying to buy regulatory favor through hefty campaign contributions. Why not spend that money to innovate and invent stuff, guys? Lobbying for political advantage is a pretty weak way to conduct "business." (I know our elected officials have fostered this environment, so it's not entirely corporations' fault.)

In a perfect world, companies wouldn't lobby for such artificial advantages at all. But at least we shareholders can give credit to businesses that conduct their donations in an honest and forthright manner, and prove willing to face the music from customers. Activist investors will almost certainly demand full disclosure on political contributions -- but every shareholder should join their push for greater transparency.

Check back at every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

The Fool owns shares of Best Buy and Wal-Mart, which are Motley Fool Inside Value picks. Motley Fool Options has recommended buying calls on Best Buy, which is also a Motley Fool Stock Advisorrecommendation. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (5) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 03, 2010, at 3:46 PM, goalie37 wrote:

    Just saw your piece on "Stock Picks for Chicks." Not to get off topic, but you are a very beautiful woman. :)

  • Report this Comment On November 03, 2010, at 5:14 PM, TMFLomax wrote:

    Thanks goalie37, you're too kind! :)

  • Report this Comment On November 03, 2010, at 7:08 PM, fepeter wrote:

    I generally agree with the issue of open and fully disclosed contributions. If stockholders don't approve of the donation, then they can address this within the company.

    But when political activists take the disclosed information and use it to beat up a company in the political arena, then some controls are needed or donations will remain secret.

    When Target openly donated to a politician who supported a regulatory environment for Target and like retailers, that seems to be a appropriate donation. But political activists picked on a minor position of the politician and tried to crucify Target. After that, all transparency in the political process dried up.

    We need openness, but we also need protections.

  • Report this Comment On November 03, 2010, at 7:36 PM, CMFStan8331 wrote:

    Given that recent Supreme Court rulings have made the whole idea of restrictions on corporate political contributions largely anachronistic, the need for shareholder vigilance on this issue will be even greater than in the past. I agree that our best hope is to push hard for transparency and full disclosure. Otherwise, it can be difficult to assess which portion of a company's profits are actually the result of lobbying. If profits are coming from political advantage and not from the quality of the actual products and services a company produces, that could (and should) have negative implications for its long-term success.

    And I can't help but agree with goalie37.

  • Report this Comment On November 04, 2010, at 4:12 PM, foolsbud wrote:

    If activist Court justices can render such drastic and shocking rulings without precedent then possibly, some future court can overturn that opinion.

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